Chapter 27: Different Candy, Different Toys

July 26, 1984, Chicago, Illinois

"You're home earlier than I expected!" Bianca declared when I walked into the condo.

"Despite significant enticement, I felt I should stick to my rule about getting involved with anyone at Spurgeon, with the obvious exceptions of you and Violet."

"Enticement?"

"I walked her home, and she invited me in for ice cream. In the process, I met her housemates, and several very direct offers were made!"

Bianca laughed, "Continuing the pattern of every single pussy being available to you!"

"You know that's not true! Anala is the primary example, and Chelsea would never do that, even if I were inclined, which I'm not."

"I'll give you Anala, but Chelsea is trying awfully hard to get your attention!"

"OK, let me modify what I said — if I had a lobotomy and started believing not just in God, but her very specific theology, then, yes, it would be available after engagement and marriage. I am absolutely not signing up for that lunacy, no matter how hot she is! Not to mention Evangelical girls have a reputation for being prudes; Catholic girls, on the other hand..."

"Go all the way in the rectory basement!" Bianca exclaimed with a smirk. "Zappa wasn't wrong! They all want to fuck you; they just need to justify it in their own minds. That was true about Rachel, and your rationale was that you didn't believe she had given up on her core beliefs."

"I think it was a bit more nuanced — I think she had convinced herself to set them aside, but evidence suggested they would still control her thinking and behavior, and the real concern was starting a relationship and having those ideas come to the forefront."

"Making you feel trapped."

"Not trapped, as any fundamental change like that would leave me free to walk away, but walking away becomes increasingly fraught with trouble the longer it goes. My analysis was that the risk was too great. I was willing to stay friends with her, and who knows what might have happened, but she chose to walk away."

"Would you like to hold your daughter?"

"I would. Let me change first. I'll be back in a flash."

Five minutes later, I was wearing shorts and a T-shirt and cuddling my daughter on my chest.

"Was Naomi upset?"

"No. I explained my reluctance based on the environment at Spurgeon, and she said she completely understood. Despite her roommates making it very clear what they wanted, I declined because I thought it would be tacky to refuse Naomi but accept offers from her roomies."

"Well, I'm sure there will be pussy in your bed tonight!"

I chuckled, "Misty, of course!"

My daughter had fallen asleep, so I carried her upstairs and put her in her crib, then got my sociology notes so I could study. I studied for about ninety minutes, and when I finished, I was satisfied I was ready for Saturday's exam. At bedtime, Bianca offered to join me, and I accepted her offer.

July 27, 1984, Chicago, Illinois

Late on Friday morning, I was notified by New Accounts that the account transfers for the FJF attorneys had been completed, and I spent the rest of the morning selling the bulk of securities that had transferred and reallocating that money, mostly to the Nikkei for the short term.

Interestingly, our model for US stocks ticked over into bullish territory for the first time in 1984. That was a product of our interest rate projections, exchange rates, and what appeared now to be a near certainty that Reagan would easily win re-election. Based on that, I began reviewing my positions to ensure my portfolio was properly aligned with what I expected to be a serious bull market, accelerating as interest rates were cut. That analysis took me to lunch, and after eating with Bianca and Violet, the three of us went to the gym.

When I returned from lunch, there were two things on my desk — a message asking me to see Murray Matheson and a gift certificate to Smith & Wollensky with a note from Norman Monroe thanking me for helping Missy with her homework. It had to have been put there by Anna or Mia because Norm Monroe was in London. I put the gift certificate in my satchel, then went to the FX office to see Murray Matheson, where Anna instructed me to go right in.

"You rang?" I asked.

"You're not tall enough to be Lurch, Kane! What's your take on Spurgeon Capital starting to market interest rate swaps?"

"Collateralized or un-collateralized?"

"Collateralized," Murray said. "Noel isn't interested in taking on the risks of un-collateralized swaps at this point."

"Then your main exposure is unexpected interest rate changes, along with being able to properly judge credit risk. Given we're not a bank, reputational risk isn't really a concern. Fundamentally, so long as we properly model forward interest rates and properly evaluate credit risk, we'd be in good shape because collateralized swaps ensure that, in default, the counterparty comes out whole; we just sit pretty and collect our fees.

"We will need to develop algorithms to ensure our inventory is properly hedged so that when it's marked to market, we don't see a net decrease in asset value. We'll also need to model the probability of default. It's those two tasks that present the biggest obstacle — the data analysts simply don't have the capacity to do that and complete their other commitments. That's especially true if you intend to offer cross-currency interest rate swaps.

"I had planned to budget for an additional data analyst for next year, but what you're talking about means we'd need two, and we really couldn't start until we had at least one of them on board. We're also budgeting for a network to connect the PCs and a Sun-2 Workstation, which we'll need if we're going to do the heavy analysis for a full portfolio of interest rate swaps. That will add around $190,000 in overhead, taking into account loaded employee costs and depreciation on the new computer equipment."

"What's the up-front cost on that computer?"

"I don't have the exact number because we just started working on the budget request due at the end of September, but Bianca estimated between $65 and $70 grand, fully configured, including tax and the first year's maintenance."

"How soon can we get the system delivered if we place an order right away?"

"Six to eight weeks, according to Bianca. We could begin working on the programs immediately, as the new system is compatible with our current system. The real constraint is finding two good programmers. There are very few with relevant experience in the financial services field, so we'd need to bring in someone like Steve Smith, with a solid background in statistics, data analytics, and programming."

"Your analysis of the risks matches mine," Murray said. "I can't really speak to the nerdy shit; that's your bailiwick. You OK with making an off-the-cuff presentation to Noel?"

"With the caveat that Bianca is the true expert, yes."

"Noel won't get down in the weeds, so you can handle it. Let me call him and see what he says."

I nodded, and Murray picked up the phone. He dialed Noel's direct number, and unsurprisingly, the call was answered immediately. They had a brief conversation, and I understood the gist from Murray's side of the call. He hung up, then stood.

"Let's go see him."

As usual, when Noel Spurgeon had an idea, or when Murray presented one Noel liked, things moved blindingly fast. That had not been the case with regard to computers when I had been in the mailroom. Now that we'd shown their true value, Noel was willing to pull the trigger much faster than he had been when Jack Nelson had been advocating for basic redundant systems during my time in the mailroom.

"How much?" Noel asked me without any preface.

"About $190,000 per year in fixed overhead, including two data analysts, the Novell NetWare setup, and the depreciation on a Sun-2 Workstation. The capital outlay would be around $90 grand. That was going to be the bulk of my ask for next year, beyond current staffing and equipment."

"How long to develop the algorithms?"

"The formulas are well understood — the Merton model has been around since 1974. That means we can fairly quickly come up with the basic credit risk analysis. It will then need to be modified for our purposes and linked to the interest rate futures analysis and our exchange rate futures analysis. That's the trickier part. Call it ninety days from when the new analyst starts work."

"Murray, do you stand by your revenue projections?"

"I do. $20 million in the first twelve months, ten times that within five years."

"And the overhead side for that $200 million?"

"Around ten staff, across the board — one each in New Accounts and Compliance; six in FX; two in the back office."

"Thanks, Murray. I'll let you know by Tuesday. Kane, stay. Murray, close the door on your way out."

Murray left, closing the door as asked.

"If you were in my chair, what would you do with Carl Taylor's and Glenn Fletcher's portfolios?"